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Raab v. Wendel

United States District Court, E.D. Wisconsin

July 10, 2019

RUDOLPH RAAB, et al., Plaintiffs,
v.
MICHAEL C. WENDEL, et al., Defendants.

          DECISION AND ORDER

          WILLIAM E. DUFFIN U.S. Magistrate Judge.

         1. Introduction

         This action involves a dispute over the management of a hotel owned by R&W Lodging, LLC. R&W had two members-Rudolph Raab, owning 80 percent, and initially Wendel Investments, Inc. but soon thereafter Wendel Enterprises, LLC, owning 20 percent. R&W agreed to have The Wendel Group manage the hotel. However, in 2007 The Wendel Group merged with defendant Sand Companies, Inc., which began to manage the hotel in place of The Wendel Group. The person behind each Wendel entity was Michael Wendel, who, purportedly acting on behalf of R&W, entered into an agreement with Sand Hospitality to manage the hotel effective January 1, 2012. The person behind the Sand entities was Leo Sand.

         Raab and R&W brought suit against the Wendel and Sand entities, as well as against Wendel and Sand personally. The action was eventually removed to federal court.

         On March 6, 2019, the court resolved the parties' motions for summary judgment. Raab v. Wendel, No. 16-CV-1396, 2019 U.S. Dist. LEXIS 35843 (E.D. Wis. Mar. 6, 2019). The defendants moved for reconsideration (ECF No. 104) and for leave to file a second amended answer (ECF No. 106). The plaintiffs also moved for reconsideration. (ECF No. 114.) The briefing on these motions is closed and the matters are ready for resolution. A jury trial is scheduled to begin on October 21, 2019.

         2. Motion to Recognize Right of Recoupment and for Leave to File a Second Amended Answer, Affirmative Defenses, and Counterclaims

         Defendants Sand Hospitality, LLC and Wendel Enterprises, LLC ask “the Court for an order under Fed.R.Civ.P. 12(b) recognizing their right to recoupment as pled in their Answer, and in their Amended Answer, to Plaintiffs' Second Amended Complaint (ECF Nos. 30, 48) ….” (ECF No. 107 at 1.) Sand Hospitality also “seeks leave to file a counterclaim against R&W for breach of the 2012 Management Agreement.” (ECF No. 107 at 1.) And Wendel Enterprises “seeks leave to file a counterclaim against R&W for repayment of loans made by Wendel Enterprises to R&W.” (ECF No. 107 at 1.)

         “The court should freely give leave [to file an amended answer] when justice so requires.” Fed.R.Civ.P. 15(a)(2). “The Supreme Court has interpreted this rule to require a district court to allow amendment unless there is a good reason-futility, undue delay, undue prejudice, or bad faith-for denying leave to amend.” Liebhart v. SPX Corp., 917 F.3d 952, 964 (7th Cir. 2019) (quoting Life Plans, Inc. v. Sec. Life of Denver Ins. Co., 800 F.3d 343, 357 (7th Cir. 2015)).

         2.1. “Recoupment”

         Even though the word “recoupment” does not appear anywhere in the answer or amended answer (ECF Nos. 30; 48), Sand Hospitality, LLC and Wendel Enterprises, LLC nonetheless assert that they have pled the affirmative defense of recoupment (ECF No. 107 at 5). They point to the following paragraph, one of twelve affirmative defenses, where they allege:

To the extent Plaintiffs make a claim for damages in the SAC, such damages, if valid, are subject to a setoff against amounts due and owing by R&W for the termination of a hotel management agreement between R&W and Sand Hospitality, LLC, and for the overpayment by one or more of the Defendants of operating loans to cover operating costs and mortgage payments for the East Troy Comfort Inn & Suites Hotel.

(ECF No. 48 at 29, ¶ 8.)

         But that paragraph alleges the affirmative defense of setoff, not recoupment. Although similar, the two are not the same. See Zweck v. D P Way Corp., 70 Wis.2d 426, 433-34, 234 N.W.2d 921, 925 (1975); O'Brien v. Freiley, 130 Wis.2d 174, 180 n.4, 387 N.W.2d 85, 88 (Ct. App. 1986). “Setoff and recoupment are doctrines relating to a demand that a defendant has against a plaintiff arising out of a separate transaction (setoff) or the same transaction (recoupment).” O'Brien, 130 Wis.2d at 180 n.4, 387 N.W.2d 85, 88.

         Thus, the court cannot grant Sand Hospitality and Wendel Enterprises the relief they seek-an order stating that they have pled recoupment as an affirmative defense. (ECF No. 107 at 9.) They have not.

         However, in their proposed second amended answer the defendants amended the relevant affirmative defense to read:

To the extent Plaintiffs make a claim for damages in the SAC, such damages, if valid, are subject to a setoff and/or recoupment against amounts due and owing by R&W for the termination of a hotel management agreement between R&W and Sand Hospitality, LLC, and for the overpayment by one or more of the Defendants of operating loans to cover operating costs and mortgage payments for the East Troy Comfort Inn & Suites Hotel.

(ECF No. 108 at 27, ¶ 8 (emphasis added).) Thus, the question is whether they should be allowed to again amend their answer to add recoupment as an affirmative defense.

         The plaintiffs do not substantively address recoupment in their response to the defendants' motion other than to observe that recoupment is not the same as setoff. (ECF No. 112 at 5.) Although the proposed amendment comes late in these proceedings, the court finds no risk of prejudice to the plaintiffs should the court permit it. There is no hint that the plaintiffs shaped their litigation strategy in reliance on the defendants' use of the word “setoff” rather than “recoupment.” The plaintiffs clearly understood that the defendants were arguing that any amount the plaintiffs might recover should be reduced by any amount they owed that defendant.

         It may be fair to characterize the distinction between setoff and recoupment as esoteric, if not antiquated. Precluding consideration of funds allegedly owed to the defendants because they used only the term “setoff” when “recoupment” covered part their claim would place undue importance on form over substance. Had the defendants avoided the term of art “setoff” and simply described the nature of its affirmative defense, or ...


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